On Fixed Income

The Federal Reserve has stated that it will raise interest rates until inflation is brought under control (2% for at least 2 - 3 months in a row). The market is predicting a fed funds rate of 3.5% (maybe as high as 4.25%) by 1Q2023. Bond values fall when interest rates rise, but a bond held to maturity will always return par.

The Fed has also stated its intention to maintain a “neutral” fed funds rate (which neither stimulates nor slows the economy) for the long term. This is quite different from the past 20 years of radical cuts to zero but it is the same as the historic (pre-2000) practice when the Fed held the fed funds rate about 2% over the inflation rate. I doubt the Fed will do that, but we’ll see.


Definitely do not buy an income ETF or bond mutual fund when interest rates are rising as they are now. The Net Asset Value (NAV) will drop as interest rates rise. Unlike individual bonds, an ETF does not have a maturity date when your principal would be returned. If yields rise, the ETf NAV will fall about 1% for every 1% rise in the prevailing interest rate MULITPLIED by the duration of the fund. Now is a bad time to invest.

All the regular Treasury yields are still below the inflation rate. But individual Treasuries are better than nothing. There is no risk of principal loss if you buy a ladder of Treasuries and hold to maturity.



For immediate safe income, several banks are raising their deposit rates. www.bankrate.com

Cash equivalents: Vanguard money market fund which yields about 2%.

For income that keeps up with inflation, consider I-bonds. These never lose principal, regardless of what interest rates do. They always return par at redemption, and must be held a year or more. Maximum $10,000 per year.

Treasury Inflation Protected Securities (TIPS) currently yield 1% above the inflation rate.

The yield curve is flat. TIPS at various maturities are available on the secondary market. The 5-year TIPS auction is 10/20/22 and the 10-year TIPS auction is 9/22/2022. You can place an order with Treasury Direct or your brokerage before the auction or buy after the auction.


TIPS that are sold on the secondary market before maturity will lose principal value if interest rates rise, but not if you hold to maturity.

The bond market currently predicts a long-term inflation rate of 2.27%. If inflation will be higher than that, TIPS will yield more than Treasuries of the same maturity.


Dividends from stocks are NOT the same as interest from fixed income securities.

Fixed income is for people who absolutely, positively like to know exactly how much money they will get from their investments. A fixed-income bank or Treasury account that is held to maturity will deliver that. If it’s an inflation-adjusted security (like an I-bond or TIPS) it will keep up with inflation.

Stocks and their dividends fluctuate. If you need money and have to sell a stock when its price is depressed you will lose principal. Which is not to say that stocks are bad – but they are riskier than bonds.